MAKING SURE A DIVORCE DOESN'T DIVIDE A FIRM

The acrimonious divorces of some high-profile CEOs have sent shockwaves through the boardrooms of corporate America.

Even spouses not involved directly in a business may be entitled to a lucrative stake if they prove they helped their ex-spouse's career indirectly -- by throwing dinner parties or schmoozing in politically correct fashion.

But what happens when one half of a couple is active in a small family business? Is the business among the assets they must divide?

Sometimes yes, if the business owner doesn't take certain steps. And because the business is often one of the owner's largest assets, giving shares to an ex-spouse can have negative consequences. To protect the assets of the business, address the issue before a problem ever arises.

Sanford K. Ain of the Washington, D.C., law firm Sherman Meehan Curtin & Ain has seen dire results -- the liquidation of the family business -- but he also has seen orderly transitions of stock back to the family with other assets distributed.

A prenuptial agreement can safeguard an owner's interests and keep the business in family hands, says Joan Kessler of Milwaukee-based law firm Foley & Lardner. "It can lessen the chance for a dispute should the marriage fall apart, and it will help if you've agreed how you'll value the business."

In recent years, prenuptial agreements have become more common because of the high divorce rate, though they are far from commonplace. "The whole issue of prenuptials is still more the exception than the rule," says Norman Leibovitz of Philadelphia law firm Fox Rothschild O'Brien & Frankel.

A recent magazine survey reported that only 3% of executives earning more than $100,000 have prenuptial agreements. The survey did not break down how many were owners of family businesses.

The prenuptial contract states what assets -- stock, real estate, insurance -- will be apportioned and how they will be divided. Sometimes, it includes a sunset provision: After a certain number of years, the agreement dies, since the marriage is expected to survive, Mr. Ain says.

The prenup may supersede a state statute governing distribution of marital property and support, says Barry Schatz of Chicago law firm Kalcheim Schatz & Berger. Nine states (Illinois is not among them) have community property laws that dictate that assets be divided equally, adds Mr. Leibovitz.

Illinois follows the rule of equitable -- but not necessarily equal -- distribution, which gives courts greater latitude to decide who deserves what.

"If one side brought a business she founded into the marriage and the business increased in value, the other side might not be entitled to half the business but to some appreciated value, depending on the contribution, duration of the marriage, their age, health and the likelihood of what they can accumulate later," says Mr. Ain.

Arranging a prenuptial agreement may cost as little as $2,500 or as much as $50,000.

Often, the stickiest part of a prenuptial is broaching the subject. "It can create tension, but I tell my clients that they may regret not doing so later," Mr. Leibovitz says.

Parents can ease the process in advance by explaining its importance to their children early, before they even start dating.

"It can be brought up periodically, over dinner or when someone in the family reads about a divorce," suggests Joe Astrachan, Wachovia Chair of Family Business at Kennesaw State University in Georgia.

Gerry LeVan, an attorney and family business expert in Charlotte, N.C., adds that business owners must make a full and honest disclosure when initiating talk of a prenuptial agreement. He suggests the following script: "One of the things I have to think about in getting married is my family wealth, which consists largely of stock in the business. I know the last thing we want to think about is that our marriage won't last, but our family has an understanding that each of us must have a prenuptial agreement." At the same time, he says, the couple can discuss their overall attitude about money.

Postnuptial agreements may be tougher to address, since it's harder to persuade someone to give up what they have, Mr. Leibovitz says. Not all children and parents buy into the necessity of prenuptials and postnuptials; often, they base a decision on what to do with assets on particular circumstances.

Mr. Schatz and others cite alternatives to prenuptial agreements. Some family members prefer to sign shareholder agreements, which state that in the event family members divorce, die or exit the company, they or their estate must offer to sell shares of the business back to the family or the company based on a previously defined formula, Mr. Schatz says.

Mr. LeVan recommends a shareholder agreement in conjunction with a prenuptial agreement for safety. Keeping stock in the family business member's name and not retitling it for joint ownership, putting it in an irrevocable family trust or dividing it into voting and non-voting shares also may help eliminate claims.

Still, some people may prefer to forgo all agreements, optimistic their union will last. The former owner of a $25-million sportswear company in Minneapolis refused to sign one even when he married a second time.

"By our nature, entrepreneurs look at a glass as half-full rather than half-empty. A prenup by definition prepares for a disaster we never see," he says. "Would it have been smart for me to sign the first time? Yes. The second? Yes. But it sends the wrong message and suggests you're not committed."